Taxing our patience: Is government doing all it can to track down tax cheats?

OTTAWA — It’s a silent, but mammoth, revenue killer that is emerging as a big problem for a federal government trying to crawl out of deficit and balance the books within two years.

Tax evasion, both at home and abroad, is stealing potentially tens of billions of dollars in revenue from federal coffers and ultimately sapping money out of the pockets of law-abiding Canadian taxpayers.

The Harper government is taking notice, following a critical report from Canada’s auditor general on domestic tax evasion; repeated complaints the government is soft on offshore tax cheats; and mounting international pressure to do more on the file.

Tax evasion is one of three main themes to be discussed when leaders from the Group of Eight large industrialized nations — including Prime Minister Stephen Harper — meet in June at the G8 summit in Northern Ireland.

Heading into the March 21 federal budget, observers are watching to see if the Conservative government announces new funding or initiatives to rein in tax scofflaws.

The Canada Revenue Agency has identified approximately $4.6 billion in unpaid taxes since 2006 from international tax avoidance. The CRA won’t say how much of that has been recovered.

Moreover, tens of billions of dollars in other unpaid taxes may be flying under the government’s radar.

“People that don’t pay their fair share of the taxes means the rest of us have to pay more,” says Liberal Sen. Percy Downe, who has been leading the fight in Parliament on tax evasion. “It’s a tremendous revenue loss to the country.” He wants the government to boost the CRA’s funding for fighting tax evasion.

As well, the Conservative-controlled House of Commons finance committee, in a recent report, called on the Tory government to examine ways to “better equip” the Canada Revenue Agency to combat tax evasion and help police prosecute tax cheats.

Finance Minister Jim Flaherty was unavailable for an interview on the matter.

However, he said last week it may make sense to invest more resources in the CRA to improve policing of Canadian tax cheats at home and abroad.

“Everybody should pay their fair share of taxes and people shouldn’t be hiding their money from the government of Canada. Some people do that offshore,” he told reporters in Ottawa.

The penalties for tax evasion include fines between 50 per cent and 200 per cent of the amount of tax evaded, and/or a prison term of up to two years.

Canadians can avoid those charges through the CRA’s voluntary disclosure program, which allows taxpayers to correct mistakes or add information that was missing from their tax returns.

The federal auditor general warned last year that the Canada Revenue Agency was unable to adequately assess and track tax cheats across the country due to limited resources and weak oversight and enforcement practices.

Auditor general Michael Ferguson highlighted several problems in how the Canada Revenue Agency monitors and enforces cases where individuals and corporations fail to file tax returns, and where businesses fail to register for the Goods and Services Tax (GST) and Harmonized Sales Tax (HST).

The CRA has identified the “underground economy” — commercial activity that’s unreported for tax reasons — as one of the biggest risks.

However, the auditor found the agency is unable to determine how effective some of its enforcement measures are in recouping unpaid income taxes.

A growing number of self-employed individuals in Canada “increases the risk of revenues going unreported,” the auditor’s report noted. The underground economy is prevalent in sectors where cash transactions are common, such as construction and home renovation, hospitality and automotive repairs.

While federal officials won’t identify how much revenue may be lost domestically from tax cheats, a CRA corporate audit from 2010 said the “criminal economy,” which includes tax fraud and evasion, “may represent billions of dollars in untaxed revenues.”

The Economist magazine focused a recent issue on international tax evasion, with a blaring headline: “The missing $20 trillion.” That’s the magazine’s rough estimate of how much global cash is stashed away in tax havens so people and corporations can avoid paying their fair share of taxes.

The Tax Justice Network, a global advocacy group fighting for fairer taxation and a crackdown on evasion, estimates somewhere between $21 trillion and $32 trillion in unreported financial wealth is socked away in tax havens.

Using data from the World Bank and other institutions, the Tax Justice Network estimates Canada’s lost revenue from tax avoidance (through havens and the underground economy) is in the tens of billions of dollars.

Canadians for Tax Fairness, a domestic advocacy group and member of the Tax Justice Network, says international tax havens alone are costing Canada potentially $7.8 billion annually.

Billions of dollars more are lost from unreported taxes in the Canadian shadow economy, the group argues. There’s no way to confirm the numbers.

Heading into the federal budget, his group is recommending the Harper government publish Canada’s estimated tax gap: the difference between what the government should be collecting in taxes and what it’s actually collecting.

Many other countries such as the United States (estimated tax gap of $385 billion) and the United Kingdom (nearly $50 billion) publish a tax gap estimate.

The group also wants the Conservative government to boost funding for the CRA’s international tax audit program.

The House of Commons finance committee held several days of hearings in February to examine tax evasion, an encouraging sign to Howlett.

“There was a change of tone. The government does seem to be taking it more seriously. We haven’t seen a whole lot of additional action yet,” he says.

The CRA has been attacked by opposition parties and taxpayer watchdogs for doing little to recoup what could be hundreds of millions of dollars in unpaid taxes tied to secret accounts in countries such as Liechtenstein and Switzerland.

The agency was provided more than five years ago with names of 106 Canadians with secret bank accounts or trusts in Liechtenstein, after an employee blew the whistle on hundreds of secret account holders across the globe.

A few years after the Liechtenstein accounts emerged, Canada received the names of 1,785 Canadians with secret accounts in Switzerland, another well-known tax haven.

The Liechtenstein investigation, dubbed Project Jade, is now virtually complete, according to Terrance McAuley, assistant commissioner of the compliance programs branch at the CRA.

McAuley recently told the finance committee the CRA had conducted 47 audits and identified $22.4 million in outstanding taxes owed, from a base of approximately $100 million in assets.

However, only about $8 million of the owed taxes have been collected, from 19 accounts, while the government is in court trying to collect the remaining $14 million from five accounts.

The Conservative government’s Bill C-48 (currently before Parliament) would, among many technical tax changes, require more information reporting on certain questionable types of tax planning, which the CRA could then use to fight tax evasion.

Canada has adopted 16 tax information exchange agreements, recently signed a few others (including with Liechtenstein) that are not yet in force, and is negotiating deals with a dozen other countries.

Critics, however, say those agreements are often ineffective in fighting tax avoidance because specific names of individuals and companies are regularly needed to extract information, when the government often doesn’t know the extent of the problem.

Instead, watchdogs argue that automatic tax exchange accords are needed, which would require governments to collect data from financial institutions on income from foreign sources and report it back to countries where the individual or company is located.

Since 2006, the CRA has audited nearly 8,000 cases suspected of having “aggressive” or abusive tax planning — used to avoid paying required taxes — that led it to identify approximately $4.6 billion in unpaid taxes.

But the CRA won’t say how much of that total has been collected and insists that it would be difficult to determine that number.

The revenue agency notes, however, that its voluntary disclosure program is growing in popularity.

The CRA says there were 9,137 voluntary disclosures (domestic and offshore) in 2007-08, totalling approximately $373 million in additional taxation, including $27 million from offshore.

The voluntary disclosures jumped to 15,167 (domestic and offshore) in the 2011-12 fiscal year, with the additional taxation collected totalling $310 million, including $72 million from offshore.

There were 4,064 voluntary offshore disclosures in 2011-12, compared with 1,596 in 2007-08.

“Our effort in terms of attempting to bring taxpayers back into the compliant world is really starting to pay off,” McAuley said at committee.

Despite hundreds of CRA employees either losing their jobs or being warned of potential layoffs due to federal spending reductions, McAuley said CRA hasn’t cut any auditors working on international tax evasion.

But Sen. Downe isn’t convinced the federal government is doing enough to fight international tax evasion.

He asked the Parliamentary Budget Officer to estimate the amount of tax revenues lost from the government “failing to reduce overseas tax evasion” and determine what the fiscal impacts will be on federal coffers from the Conservative government cutting hundreds of positions at the CRA.

The PBO has requested information from the CRA, but the agency has told him it is unable to share the relevant data, further frustrating Downe.

Harper will confront the issue of international tax evasion when he attends the meeting of G8 leaders being held in June in Northern Ireland.

British Prime Minister David Cameron, who’s hosting the G8 talks, has made tax evasion one of the meeting’s main agenda items, insisting the world’s largest economies must do more to curb the growing problem.

“We want to use the G8 to drive a more serious debate on tax evasion and tax avoidance. This is an issue whose time has come,” Cameron said in a major speech in late January to the World Economic Forum.

“After years of abuse, people across the planet are rightly calling for more action, and most importantly there is gathering political will to actually do something about it.”

Senior Parliament Hill reporter for the Ottawa Citizen, politics junkie, wannabe pro golfer and someone who has wordsmithed at newspapers in Ontario, Alberta and Saskatchewan. I've covered politics at... read more every level, including city hall in Ottawa and Calgary, the Alberta legislature in Edmonton and now back in Ottawa covering the Hill.View author's profile